Netflix delivered a huge surprise at its Q4 2020 earnings release, and the market rewarded its shares with an instant 10% gain. While it was not that difficult to expect positive results in a quarter where the pandemic still ravaged the world, Netflix surprised on two key metrics – the number of new subscribers added in the quarter and a staggering increase in FCF (Free Cash Flow).
Netflix Added 8.5 Million New Subscribers in Q4 2020
The market expected about 6 million new paid subscriptions, but Netflix managed to add about two-and-a-half million more. As a result, the revenue grew accordingly, reaching $6.6 billion, up 21.5% on a Y/Y basis.
With the newly 8.5 million subscribers, Netflix passed the 200 million subscribers mark, an impressive number by all metrics. Keep in mind that 2020 is the year when Disney+ entered into the game, and competition from Apple Plus intensified too. Many voices have assumed that Netflix will lose market share, but instead, the growth keeps ongoing. For the entire 2020, Netflix added a record 37 million new paid subscribers, exceeding all expectations.
The income statement does not show a robust bottom line (i.e., net income) as in the previous quarters. For example, net income for the fourth quarter was $542 million, lower than all quarterly figures in the year and even lower than Q4 2019. However, the explanation comes from the constant investment in original content that will pay “dividends” in the future.
Judging by the picture above, it is hard to imagine a better picture of Netflix’s original shows’ popularity. According to Google searches, 9 out of top ten searches in the category belong to Netflix.
As such, it comes as no surprise that for the first quarter of the next year, the company forecast net income to bounce to $1.3 billion, mainly driven by another 23.6% growth in revenue, while expenses drop significantly.
Perhaps the most important metric is the FCF. While negative for the quarter, the market expected much worse numbers. Because of the positive surprise, the FCF for the year is positive too, a big milestone for Netflix.
Challenges ahead exist. Competition, as mentioned earlier, is tough and about to become tougher. Restrictions caused by the pandemic make it difficult to deliver new content in a timely manner. They also increase the production costs.
However, Netflix shows resilience and enough strength to remain the number one streaming powerhouse. As such, the rise in the share price should take no one by surprise.